Ensuring you Maximize your 2022 Personal Tax Deductions and Tax Credits

Unfortunately, any tax planning for your 2022 personal tax return needed to be done by December 31^st of 2022 and there is very little, if any, planning you can do in March and April of this year.

However, there is still hope to reduce your 2022 income tax liability, especially if you are not a detailed organizer of information.

Today, I will review a few deductions and tax credits people sometimes leave on the table. None of this is cutting edge information; it is just double checking you have claimed all your deductions and credits. In fact, if you read my last blog post On How to Get on Your Accountants Good Side During Tax Season, you may have already assembled much of that information for your accountant and your double checking and digging for receipts will be limited.

Tax Deductions and Tax Credits to Double-Check Completeness

Carrying Charges

Many people borrow to finance their stock market investments, real estate and rental property investments or capital contributions to their professional firms or other possible investments. In many cases, a summary letter of the interest expense paid on your bank loan or line of credit is not provided by the lender and can be easily overlooked.

If you have not received a summary document, see if you can obtain a summary letter from your financial institution. Failing that, ensure you have summarized each interest charge for January to December 2022.

Capital Losses

If you engage an accountant or use tax software to prepare your return, the software will typically keep track of any capital loss carryforwards you have to apply against any capital gains you incur in the year. However, the carryforward information is predicated on accurate historical information being input in the first place.

I have occasionally seen capital losses missed due to improper carryforward information, especially where T1 Adjustments have been filed in prior years in respect of capital gains and losses. To ensure your information is accurate (your accountant will likely do this if they have access to your CRA information) check your 2021 income tax assessment in the explanation section. This section reflects any capital losses carried forward. Alternatively, if you have registered for My Account with the CRA, check the balance online.

Donation Tax Credits

It is very easy to miss a donation receipt. It can be lost in the mail, caught in your email spam or be misplaced. I suggest you quickly scan your monthly bank statement and/or credit card statement to ensure you are not missing any charitable receipt.

Going forward (if you are not doing this already), best practice would suggest you enter each donation you make during the year on an Excel or other spreadsheet and have an additional column that tracks whether your have received the tax receipt for each donation you made. This allows you to follow-up any missing donation tax receipts. 

Medical Tax Credits

Medical receipts are similar to donation receipts. You should again review your bank statement and credit card statement to ensure you are not missing any medical receipts. For health and medical practitioners you use on a consistent basis such as orthodontists, chiropractors, physiotherapists, dentists etc. ask them to print out a summary of paid expenses for 2022 (or for the twelve month period ending in 2022 if you are using that alternative).

If you have a health insurance plan, you should go online and print out all the insurance statements relating to any reimbursements made by the insurance company in 2022. Under most health and dental plans, you will have incurred some portion of the medical or dental cost and that uncovered portion is deductible as a medical credit.

Going forward (if you are not doing this already), best practice would suggest you enter each medical expense you incur during the year on an Excel or other spreadsheet and have an additional column that tracks whether your have received a receipt marked paid for that expense (ensure your receipts reflect your payment made, this will keep the CRA happy). If you have a Health Insurance Plan, I would have an additional column that reflects insurance reimbursements for your medical expense. This ensures you claim all non-reimbursed medical expenses.  

Pension Splitting 

If you are eligible for pension splitting, this could result in significant tax savings. Most tax programs have a function to maximize the pension splitting, but I would ensure the function has been applied and any eligible pension income has been split to your benefit.

Employment and Business Expenses

Employees may receive a T2200s or T2200 from their employers that allow them to deduct home office expenses and other employment expenses. If you are entitled to claim employment expenses, ensure you have received these forms from your employer or request the form, if you are entitled to claim employment deductions.

Once you have the form, go through your expenses for the year to ensure you have captured all your home office, car or other employment expenses you are entitled to claim. It is best practice to record these expenses throughout the year (monthly or quarterly) so you do not miss any expenses or create a 5 hour receipt sorting project at tax time.

If you are self-employed, you will not need a T2200. However, the same advice holds as for business expenses as for employee expenses. Ensure you have captured all your expenses for the year through diligent tracking.

Ontario Staycation

If you are an Ontario resident, don’t forget to assemble your Staycation receipts. Ontario residents can claim 20% of their eligible 2022 accommodation expenses. For example, for a 2022 stay at a hotel, cottage or campground you can claim eligible expenses of up to $1,000 as an individual or $2,000 if you have a spouse, common-law partner or eligible children, to get back up to $200 as an individual or $400 as a family. For Staycation information, see this link.

 

The above discussion is not tax planning. It is record keeping diligence. As noted above, I suggest you get in the habit of tracking these items throughout the year to avoid missing any deduction or credit at tax-time.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Tax Gain/Loss Selling 2022 Version

In keeping with tradition, I am today posting my annual blog on tax gain/loss selling. I write this blog annually because every year around this time, people get busy with holiday shopping (or at least online shopping these days) and forget to sell the “dogs” in their portfolio and consequently, they pay unnecessary income tax on their capital gains in April. Alternatively, selling stocks with unrealized gains may be beneficial for tax purposes in certain situations.

As I am sure you are more than acutely aware, the stock markets in 2022 have been very weak. Consequently, you may have realized capital losses in 2022 or have unrealized capital losses starring back at your from your investment statement. 

The goods news at this point in time is; if you reported capital gains in 2019-2021, you may be able to carryback any realized 2022 capital losses and/or possibly trigger capital losses on securities with unrealized losses to carryback.

In any event, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options in the next week or two and if you are a DIY investor set aside some time this weekend or next to review your 2022 capital gain/loss situation in a calm, methodical manner. You can then execute any trades you decide are investment and tax effective on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling.

I am going to exclude the detailed step by step capital gain/loss methodology I have included in some prior years blog posts. If you wish the detail, please refer to my 2020 tax loss selling post post and update the years (i.e., use 2021, 2020 & 2019 in lieu of 2019, 2018 and 2017). 

You have three options in respect of capital losses realized in 2022:

1. You can use your 2022 capital losses to offset your 2022 realized capital gains

2. If you still have capital losses after offsetting your capital gains, you can carry back your 2022 net capital loss to offset any net taxable capital gains incurred in any of the three preceding years

3. If you cannot fully utilize the losses in either of the two above ways, your can carry your remaining capital loss forward indefinitely to use against future capital gains (or in the year of death, possibly against other income)

Tax-Loss Selling

I would like to provide one caution about tax-loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes with the intention of re-purchasing those stocks, and one or two of the stocks take off during the 30-day wait period—raising the cost to repurchase far in excess of their tax savings.

Thus, you should only consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses on stocks you still wish to own, be wary if you are planning to sell and buy back the same stock. Your advisor may be able to "mimic" the stocks you sold with similar securities for the 30-day period or longer or utilize other strategies, but that should be part of your tax loss-selling conversation with your advisor.

Identical Shares

Many people buy the same company's shares (say Bell Canada for this example) in different non-registered accounts or have employer stock purchase plans. I often see people claim a gain or loss on the sale of their Bell Canada shares from one of their non-registered accounts but ignore the shares they own of Bell Canada in another account. Be aware, you must calculate your adjusted cost base over on all the identical shares you own in all your non-registered accounts and average the total cost of your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell is higher in one of your accounts, you cannot pick and choose to realize a gain or loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchases an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and is added to the cost base of the new shares acquired.

Transferring Losses to a Spouse who has Capital Gains

In certain cases you can use the superficial loss rules to transfer a capital loss you cannot use to your spouse. This is complicated and should not be undertaken without first obtaining professional advice.

Tax-Gain Selling

While most people are typically looking at tax-loss selling at this time of year, you may also want to consider selling stocks with gains to net-off against capital losses, for marginal tax rate planning, charitable purposes (see below) or other reasons.

Donation of Marketable Securities

If you wish to make a charitable donation, a great way to be altruistic and save tax is to donate a non-registered marketable security that has gone up in value. As discussed in this blog post, when you donate qualifying securities, the capital gain is not taxable and you get the charitable tax credit. Please read the blog post for more details. 

Settlement Date

It is important to ensure that any 2022 tax planning trade is executed by the settlement date, which my understanding is the trade date plus two days (U.S. exchanges may be different). See this excellent summary for a discussion of the difference between what is the trade date and what is the settlement date. The summary also includes the 2022 settlement dates for Canada and the U.S. which are both December 28th this year.

Corporations - Passive Income Rules

If you intend to tax gain/loss sell in your corporation, keep in mind the passive income rules. This will likely require you to speak to your accountant to determine whether a realized gain or loss would be more effective in a future year (to reduce the potential small business deduction clawback) than in the current year.

Summary

As discussed above, there are a multitude of factors to consider when tax gain/loss selling. It would therefore be prudent to start planning now with your advisors, so that you can consider all your options rather than frantically selling at the last minute.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Tax-Loss Selling - 2018 Version

In keeping with my annual tradition, I am today posting a blog on tax-loss selling. I am doing it again because the topic is very timely and every year around this time, people get busy with holiday shopping and forget to sell the “dogs” in their portfolio and as a consequence, they pay unnecessary income tax on their capital gains in April.

Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax-loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options.

For full disclosure, the following two comments are the only new items to consider that are different from last year's version.

1. The stock markets in 2018 have been much weaker than the last few years and you may unfortunately have "more opportunity" to sell stocks with unrealized losses to reduce your current year capital gains or carryback the losses to any of the last 3 years to recoup some of the tax you paid on gains you previously realized.

2. If you intend to tax-loss sell in your corporation, keep in mind the new passive income rules are applicable for taxation years beginning after 2018 and you should speak to your accountant to determine whether a realized loss would be more effective in a future year (to reduce the potential small business deduction clawback) than the current year.

Many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2018 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling.

I would like to provide one caution in respect of tax-loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses on stocks you still wish to own, be wary if you are planning to sell and buy back the same stock. It should be noted your advisor may be able to "mimic" the stocks you sold with similar securities for the 30 day period or longer or utilize other strategies, but that should be part of your tax loss-selling conversation with your advisor.

This blog post will take you through each step of the tax-loss selling process.

Reporting Capital Gains and Capital Losses – The Basics

All capital gain and capital loss transactions for 2018 will have to be reported on Schedule 3 of your 2018 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.

Capital Losses

If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income (unless you are filing for a deceased person. In that case, get professional advice as the rules are different). However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.

Planning Preparation

I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:

1. Retrieve your 2017 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information is also easily accessed online if you have registered with the CRA My Account Program.

2. If you do not have capital losses to carryforward, retrieve your 2015, 2016 and 2017 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2015, 2016 and 2017.

3. For each of 2015-2017, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.

4. Finally, if you had net capital losses in 2016 or 2017, review whether you carried back those losses to 2015 or 2016 on form T1A of your tax return. If you carried back a loss to either 2015 or 2016, reduce the gain on your spreadsheet by the loss carried back.

5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2015 to 2017, you can potentially generate an income tax refund by carrying back a net capital loss from 2018 to any or all of 2015, 2016 or 2017.

6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.

Now that you have all the information you need, it is time to be strategic about how to use your losses.

Basic Use of Losses

For discussion purposes, let’s assume the following:

· 2018: total realized capital loss of $30,000

· 2017: taxable capital gain of $15,000

· 2016: taxable capital gain of $5,000

· 2015: taxable capital gain of $7,000

Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2018 against the $7,000 and $5,000 taxable capital gains in 2015 and 2016, respectively, and apply the remaining $3,000 against your 2017 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2017 taxable capital gains, you may want to consider whether you want to sell any other stocks with unrealized losses in your portfolio so that you can carry back the additional 2018 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2017. Alternatively, if you have capital gains in 2018, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.

Identical Shares

Many people buy the same company's shares (say Bell Canada) in different accounts or have employer stock purchase plans. I often see people claim a gain or loss on the sale of their Bell Canada shares from one of their accounts, but ignore the shares they own of Bell Canada in another account. However, be aware, you have to calculate your adjusted cost base on all the identical shares you own in say Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell are higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares, not the higher cost base shares.

Creating Gains when you have Unutilized Losses

Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks and you must discuss any purchase with your investment advisor). 

Purchasing a flow-through limited partnership will provide you with a write off against regular income pretty much equal to the cost of the unit; and any future capital gain can be reduced or eliminated by your capital loss carryforward. For example, if you have a net capital loss carry forward of $75,000 and you purchase a flow-through investment in 2018 for $20,000, you would get approximately $20,000 in cumulative tax deductions in 2018 and 2019, the majority typically coming in the year of purchase. Depending upon your marginal income tax rate, the deductions could save you upwards of $10,700 in taxes. When you sell the unit, a capital gain will arise. This is because the $20,000 income tax deduction reduces your adjusted cost base from $20,000 to nil (there may be other adjustments to the cost base). Assuming you sell the unit in 2020 for $18,000 you will have a capital gain of $18,000 (subject to any other adjustments) and the entire $18,000 gain will be eliminated by your capital loss carry forward. Thus, in this example, you would have total after-tax proceeds of $28,700 ($18,000 +$10,700 in tax savings) on a $20,000 investment.

Donation of Marketable Securities

If you wish to make a charitable donation, a great way to be altruistic and save tax is to donate a marketable security that has gone up in value. As discussed in this blog post from two weeks ago, when you donate qualifying securities, the capital gain is not taxable. Read the blog post for more details.

Donation of Flow-Through Shares

Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.

So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired.

Disappearing Dividend Income

Every year I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.

Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains

In certain cases you can use certain provisions of the Income Tax Act to transfer losses to your spouse. As these provisions are complicated and subject to missteps, you need to engage professional tax advice.

Settlement Date

It is my understanding that the settlement date for Canadian stock markets in 2018 will be December 27th, as the settlement date is now the trade date plus 2 days (U.S. exchanges may be different). Please confirm this date with your investment advisor, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2018 by December 27, 2018.

Summary

As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while waiting in line with your kids to see Santa the third week of December.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

The Best of The Blunt Bean Counter - Legacy Stocks - To Sell or Not Sell? That is the Question?

This summer I am posting the "best of" The Blunt Bean Counter blog while I work on my golf game. Today, I am re-posting a March, 2017 blog on whether to sell Legacy stock positions. People are often frozen into "in-action" because of the tax consequences of selling a legacy position, especially where you have a large unrealized capital gain.

Legacy Stocks - To Sell or Not Sell? That is the Question?

Some people, typically seniors/baby boomers have owned stocks for decades, either through direct purchase or an inheritance of some kind (stocks transferred from a deceased spouse pursuant to their will generally have an adjusted cost base equal to what the deceased spouse originally paid for the shares; shares inherited from a parent or grandparent will generally have a cost base equal to the fair market value on the day of inheritance). These stocks are commonly known as Legacy Stocks; more often than not, they will include shares of Bell Canada, the Canadian bank(s) and/or insurance companies.

In early 2017,  Rob Carrick, The Globe and Mail’s excellent personal finance columnist  mentioned to me that several of his readers had asked him about selling their legacy stocks (or as more typically is the case, not selling their legacy stocks). I told him I thought the issue would make a good blog topic and asked him if he was okay with me using his idea to write a post. He gave me his blessing, so today I am writing about the issues and considerations for those of you holding legacy stocks and similar type securities.

The Common Quandary

The issue with selling legacy stocks is that they:

1. Typically have huge unrealized capital gains and thus the sale of these stocks creates a large tax bill

2. The realization of the capital gain can result in a clawback of Old Age Security ("OAS"), which seniors are loathe to ever repay

I know some readers, especially my millennial readers are thinking to themselves “Is Mark really going to write about minimizing the large capital gains of baby boomers that have already benefited from the huge increases in real estate? Cry me a river that they owe some tax.” The answer is yes, since a tax issue is a tax issue and this blog, although meant for everyone, is targeted to high-net-worth individuals and owners of private corporations.

There Is No One Size Fits All Answer

If you have a legacy stock(s) you are considering selling, there is not a standard “one size fits all” answer. There are various investment and income tax considerations. I discuss these issues and considerations below.

Capital Gains Rates

The marginal tax rate for capital gains in Ontario for income in the $45-$75k range is approximately 12-15%. This rate jumps to 19-22% or so between $90-$140k in taxable income and hits 26.8% once your taxable income exceeds $220,000.

Capital gains rates are the lowest tax rates you get in Canada. So from my perspective, the taxes you would pay from the sale of a legacy stock should not be the determinant in deciding to sell. The key factor (subject to the discussion below) should always be what the best investment decision is. Watching a stock drop 15%, to save 20% in capital gains tax, makes absolutely no sense, when viewed in isolation.

There has been concern the last few years that the Federal government may change the taxable inclusion amount of a capital gain from 1/2 to 2/3 or even 3/4. However, as this is only conjecture, if you were to sell for this reason only, you would be accelerating your tax payable.

Old Age Security Clawback

As noted above, the capital gains tax tail should not wag the tax dog. However, there is one issue that complicates the matter for seniors and that is the Old Age Security Clawback.

As evidenced by many accountants’ scars and wounds, never cause even the sweetest senior to have an OAS claw back, because all hell breaks loose :). I am only half-joking; seniors really resent having their OAS clawed back. I assume it is because they feel they have an entitlement to this money and the government does not have the right to claim all or some portion back (even though, they did not directly fund this program).

Seniors must pay back all or a portion of their OAS as well as any net federal supplements if their annual income exceeds a certain amount. For 2017, if your net income before adjustments is greater than $74,789 ($73,756 for 2016) then you will have to repay 15% of the excess over this amount, to a maximum of the total amount of OAS received. The maximum repayment is hit around $119,000.

So if you have a capital gain on a legacy stock of $90,000 ($45k taxable) and you are right at the $74,789 OAS limit before the capital gain, the tax cost of the capital gain would be around $15,000 or 17% of the $90,000 gain. However, when you add the OAS clawback that would be applicable, the combined tax and OAS clawback could approach $22,000 or 25% or so. That is why you cannot look at the gain in isolation.

If you do not have an investment reason to sell your stock, you may want to consider selling the stock over a few years to minimize the tax and OAS clawback, assuming you wish to keep the stock each year.

Holding Company

A “sexier” alternative, especially for seniors is to transfer your stocks to a holding company. You should be able to do this on a tax-free basis under Section 85 of the Income Tax Act. The benefit to doing this is any dividends earned and the eventual capital gain are taxed in the holding company and thus, do not affect your OAS clawback. In addition, if you have any potential U.S. estate tax exposure (see this prior blog post on estate tax), the U.S. stocks in your holding company will not be subject to U.S. estate tax if there is estate tax in place at the time of your passing (estate tax is a U.S. political issue that keeps changing depending upon the party in charge). So while you do not save any actual income tax, you can save your OAS from being clawed back and possibly gain some U.S. estate protection.

The downside to this strategy is the cost to transfer the stocks (legal and accounting) and ongoing accounting costs, which can be high for a holding company and thus, potentially a significant part of the OAS clawback savings is now paid to your accountant instead of the government, so you have to weigh the savings versus the costs.

Capital Losses

If you plan on triggering capital gains on legacy stocks, you should review if you have any capital losses you can apply against these gains. The CRA notes your capital loss carryforward balance on your notice of assessment and if you have a My CRA account, you can get this information online. It should be noted, the application of the losses only reduce the capital gains tax, not the OAS clawback.

Charitable Donation

Where you donate public securities to a registered charity, the capital gains inclusion rate is set to zero. Thus, there would be no capital gain to report on the donation of a legacy stock (have your accountant run the numbers, but this should minimize or eliminate the clawback) and you receive a donation credit. This is reported on Form T1170 . This strategy is effective if you make large donations every year or were planning to make a substantial donation and helps the charity since you have more funds to donate than with an after-tax donation.

The decision to sell a legacy stock is not a simple one. The overriding decision should still be an investment decision; however, where you are indifferent to selling, you need to consider the various issues and options I have noted above. Before undertaking any legacy stock selling, you should consult your investment advisor and possibly your accountant.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Terminal Income Tax Return Planning – Capital Gains and Losses

Today, I am going to discuss tax planning in respect of capital gains and losses on the final tax return (“terminal return”) of a deceased person. While a slightly morbid topic, many of you likely have been named as an executor in your parents, siblings or friends wills and today's discussion will provide you some basic understanding of one of the more important issues when filing a terminal return.

General Rules

When a person passes away, they are deemed under the Income Tax Act (“Act”), to have disposed of their capital property immediately prior to their death. In English, this means you are taxed as if you sold all your capital property the moment before you died and thus, your estate must recognize any capital gains or losses caused by this phantom disposition. For example, say a person had 100 shares of ABC Co. which they bought at $10 in 2010 and at their date of death, the stock was trading at $18. They would have a deemed capital gain of $800 ($18-10 x 100 shares) even though they never had sold the stock before they passed away.

The most typical examples of capital property are stocks, cottages and rental properties (I have assumed the real estate is capital property and not inventory, which it could be if your business is real estate development).

There is one main exception to the deemed disposition rule. Where you are married or live common law and have left your property to your spouse, there is an automatic spousal rollover such that these assets can be transferred to your surviving spouse with no immediate tax consequences and the deemed disposition can be deferred until the death of the surviving spouse.

The rest of this discussion involves planning where the deceased person has a spouse. If this is not the case in your particular circumstance, you can stop reading unless you want some general knowledge or will be an executor in the future.

Electing Out of The Automatic Spousal Rollover

The Act contains an interesting provision that allows a person’s legal representative to elect out of the automatic spousal rollover noted above. The election which is done on a property-by-property (or share by share) basis is typically undertaken for the following two reasons.

1. To trigger capital gains

2. To trigger capital losses

Triggering Capital Gains

You may wish to trigger a capital gain for the reasons I list below:

1. The deceased person is in a low-income tax bracket and by triggering capital gains, you utilize their marginal tax rates.

2. The deceased person was a small business owner and their shares are eligible for the Qualifying Small Business Corporation tax exemption of $848,252.

3. The deceased person had capital losses or non-capital losses that would be “lost” if you do not trigger additional income (be careful with this one, as per #2 below, the capital losses can be deducted against income in the year of death in certain circumstances, so don't waste them).

4. The deceased person has donation or medical credits that will not be utilized without additional income being generated.

It is important to note, not only is the election beneficial for the reasons listed above, but there is a significant additional benefit. Where you elect to trigger a capital gain, the cost base of the capital property to the surviving spouse is increased to the fair market value of the property elected on. So, for example, if an executor elected out of the automatic spousal rollover on the 100 shares of ABC Co. the adjusted cost base of the shares to the surviving spouse would now be $1,800 (100 shares x $18 market value at death) instead of $1,000

Triggering Capital Losses

Although slightly counter intuitive, a legal representative may wish to trigger a capital loss. There are two reasons for this:

1. Any net capital loss triggered can be carried back against capital gains reported in the prior 3 years.

2. The representative can also choose to apply the capital losses against any other income on the terminal return and the preceding year. This means the capital loss can be applied against not only capital gains, but regular income if the capital losses are greater than any capital gains on the terminal return and prior years return. The one constraint is that if the deceased had claimed their capital gains exemption in prior years, the loss carryback is reduced by the prior capital gains exemption claim and may wipe out the benefit of option #2.

Tax planning for a terminal tax return is very complicated and I have simplified the above for purposes of discussion. If you are an executor for a will, I strongly urge you to seek professional advice to guide and assist you through the various tax implications and options.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Confessions of a Tax Season Accountant - Determining the Adjusted Cost Base of Your U.S.Securities

Last week I received an avalanche of tax returns, as my clients finally received their T3 and T5013 tax slips (although many are now being amended). Driving to work to prepare all these returns was problematic, as the weather in Toronto was terrible. While snow in April is not what you hope for, the upside for an accountant is; my friends cannot call me on each hole of the golf course to torment me while I am working away doing tax returns. But I digress.

While preparing returns last week, I only found one noteworthy issue to discuss; that being the tracking of the adjusted cost base of U.S. stocks and securities. This issue rears its ugly head when filing terminal tax returns (the final return in the year of death) and for anyone who sells U.S. stocks and receives a capital gain/loss report solely in U.S. dollars.

What is the Adjusted Cost Basis of Your U.S. Securities? Your Guess is as Good as Mine

Unfortunately, over the past 15 months or so, I had a couple clients pass away. As discussed in this blog post, when you die, there is a deemed disposition of the capital property you own on death (unless you have a surviving spouse to whom you transfer your property under your will, although you can elect out of  this provision on a security by security basis). My issue has been obtaining the historical purchase dates of the U.S. stocks to determine the deemed disposition gain for these client's U.S. stock holdings.

For example. Say a client purchased IBM at $40 in their U.S. portfolio years ago when the exchange rate was say $1.05. The converted Canadian cost base is $42 ($40x1.05). Let’s assume the stock price upon the date of their death was $150. If the exchange rate on death is $1.30, the deemed proceeds are $195, and the capital gain should be $153 ($195-42).

However, in two cases where I had a client pass away, all I was provided with from the investment manager/institution was a U.S. cost base of $40 and a U.S. fair market value of $150. If I just convert both the $40 cost and $150 value at death at say $1.30, this would result in a capital gain of $143 instead of the correct $153. Where the U.S. stocks have been purchased with the current advisor, typically they can at least provide me with the purchase dates and sometimes they can run a new report with the converted $Cdn ACB. Where stocks were initially purchased by the client on their own or with another advisor, it is almost impossible to get the original purchase date unless the executor can find the original purchase documents.

The standard reasoning provided by reporting entities for not having this information is that the stocks were transferred to them and they don’t have the historical cost. I can live with that explanation, but query why when U.S. stocks are purchased by the manager or institution, they do not in many cases automatically track and convert to a $Cdn ACB? Another of life’s little tax mysteries.

Often I must play detective and try to somehow determine when these stocks were purchased which is either extremely time consuming or not possible given the lack of records.

Many of you may have this same issue if you have a U.S. stock portfolio with an investment advisor or financial institution and your yearly realized report is provided only in U.S. dollars. How do you know what your adjusted $Cdn cost base is? I suggest that in order to alleviate this problem, you ask your advisor to provide you on an annual basis with the $Cdn adjusted cost base of your U.S. stocks whether they have to push a button or have their assistant do it on a spreadsheet. You pay for this. If you are a DIY investor, you should ensure you note the foreign exchange date down for every U.S. or foreign stock purchase.

Long story short, this a significant reporting issue while you are alive and after you pass away.

Note: I am sorry, but I do not answer questions in late April due to my workload, so the comments option has been turned off. Thus, you cannot comment on this post and past comments on other blog posts will not appear until I turn the comment function back on.

This is my last post (although I may post a guest blog) for a couple weeks, so see you in May.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Tax Loss Selling - 2017 Version

In keeping with my annual tradition, I am today posting a blog on tax loss selling. I am doing it again because the topic is very timely and every year around this time, people get busy with holiday shopping and forget to sell the “dogs” in their portfolio and as a consequence, they pay unnecessary income tax on their capital gains in April.

Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So, if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options (if you must initiate the contact, consider that a huge black mark against your advisor).

For full disclosure, there is very little that is new in this post from last year's version. Similar to last year, when there were rumours that the 2017 Federal budget may change the inclusion rate on capital gains from 1/2 to 3/4, I know some people are considering taking gains as they have seen where the Liberal government is going with taxation policies and they feel it is just a matter of time until the capital gains inclusion rate is changed. I have no knowledge of whether such a change is on the table, however, it would not surprise me at this point, although, to be honest, nothing taxation wise from this government would surprise me. It is also interesting to note the change as to how the settlement date for stock trades is determined, see the second last paragraph of this post for the details.

Many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2017 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling. As the markets have been surprisingly strong (at least to me) this year, hopefully you don't have very many stocks with unrealized capital losses you can sell to use the losses against capital gains you have realized in 2017 or that you can carryback to one of the last 3 years.

I would like to provide one caution in respect of tax loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses on stocks you still wish to own, be wary if you are planning to sell and buy back the same stock.

This blog post will take you through each step of the tax-loss selling process.

Reporting Capital Gains and Capital Losses – The Basics

All capital gain and capital loss transactions for 2017 will have to be reported on Schedule 3 of your 2017 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.

Capital Losses

If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income (unless you are filing for a deceased person. In that case, get professional advice as the rules are different. I will post on this issue in 2018). However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.

Planning Preparation

I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:

1. Retrieve your 2016 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information is also easily accessed online if you have registered with the CRA My Account Program.

2. If you do not have capital losses to carryforward, retrieve your 2014, 2015 and 2016 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2014, 2015 and 2016.

3. For each of 2014-2016, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.

4. Finally, if you had net capital losses in 2015 or 2016, review whether you carried back those losses to 2014 or 2015 on form T1A of your tax return. If you carried back a loss to either 2014 or 2015, reduce the gain on your spreadsheet by the loss carried back.

5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2014 to 2016, you can potentially generate an income tax refund by carrying back a net capital loss from 2017 to any or all of 2014, 2015 or 2016.

6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.

Now that you have all the information you need, it is time to be strategic about how to use your losses.

Basic Use of Losses

For discussion purposes, let’s assume the following:

· 2017: realized capital loss of $30,000

· 2016: taxable capital gain of $15,000

· 2015: taxable capital gain of $5,000

· 2014: taxable capital gain of $7,000

Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2017 against the $7,000 and $5,000 taxable capital gains in 2014 and 2015, respectively, and apply the remaining $3,000 against your 2016 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2016 taxable capital gains, you may want to consider whether you want to sell any “dogs” in your portfolio so that you can carry back the additional 2017 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2016. Alternatively, if you have capital gains in 2017, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.

Identical Shares

Many people buy the same company's shares (say Bell Canada) in different accounts or have employer stock purchase plans. I often see people claim a gain or loss on the sale of their Bell Canada shares from one of their accounts, but ignore the shares they own of Bell Canada in another account. However, be aware, you have to calculate your adjusted cost base on all the identical shares you own in say Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell are higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the gain or loss based on the average adjusted cost base of all your Bell shares, not the higher cost base shares.

Creating Gains when you have Unutilized Losses

Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks and you must discuss any purchase with your investment advisor). 

Purchasing a flow-through limited partnership will provide you with a write off against regular income pretty much equal to the cost of the unit; and any future capital gain can be reduced or eliminated by your capital loss carryforward. For example, if you have a net capital loss carry forward of $75,000 and you purchase a flow-through investment in 2017 for $20,000, you would get approximately $20,000 in cumulative tax deductions in 2017 and 2018, the majority typically coming in the year of purchase. Depending upon your marginal income tax rate, the deductions could save you upwards of $10,700 in taxes. When you sell the unit, a capital gain will arise. This is because the $20,000 income tax deduction reduces your adjusted cost base from $20,000 to nil (there may be other adjustments to the cost base). Assuming you sell the unit in 2019 for $18,000 you will have a capital gain of $18,000 (subject to any other adjustments) and the entire $18,000 gain will be eliminated by your capital loss carry forward. Thus, in this example, you would have total after-tax proceeds of $28,700 ($18,000 +$10,700 in tax savings) on a $20,000 investment.

Donation of Flow-Through Shares

Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.

So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired.

Disappearing Dividend Income

Every year I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.

Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains

In certain cases you can use certain provisions of the Income Tax Act to transfer losses to your spouse. As these provisions are complicated and subject to missteps, you need to engage professional tax advice.

Settlement Date

It is my understanding that the settlement date for Canadian stock markets in 2017 will be December 27th, as the settlement date has changed from the old trade date +3 days, to the trade date plus 2 days (U.S. exchanges may be different). Please confirm this date with your broker, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2017 by December 27, 2017.

Summary

As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while waiting in line with your kids to see Santa the third week of December.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.

Legacy Stocks - To Sell or Not Sell? That is the Question?

Many people, typically seniors/baby boomers have owned stocks for decades, either through direct purchase or an inheritance of some kind (stocks transferred from a deceased spouse pursuant to their will generally have an adjusted cost base equal to what the deceased spouse originally paid for the shares; shares inherited from a parent or grandparent will generally have a cost base equal to the fair market value on the day of inheritance). These stocks are commonly known as Legacy Stocks; more often than not, they will include shares of Bell Canada, the Canadian bank(s) and/or insurance

companies.

Several weeks ago, Rob Carrick, The Globe and Mail’s excellent personal finance columnist  mentioned to me that several of his readers had asked him about selling their legacy stocks (or as more typically is the case, not selling their legacy stocks). I told him I thought the issue would make a good blog topic and asked him if he was okay with me using his idea to write a post. He gave me his blessing, so today I am writing about the issues and considerations for those of you holding legacy stocks and similar type securities.

The Common Quandary

The issue with selling legacy stocks is that they:

1. Typically have huge unrealized capital gains and thus the sale of these stocks creates a large tax bill

2. The realization of the capital gain can result in a clawback of Old Age Security ("OAS"), which seniors are loathe to ever repay

I know some readers, especially my millennial readers are thinking to themselves “Is Mark really going to write about minimizing the large capital gains of baby boomers that have already benefited from the huge increases in real estate? Cry me a river that they owe some tax.” The answer is yes, since a tax issue is a tax issue and this blog, although meant for everyone, is targeted to high-net-worth individuals and owners of private corporations.

There Is No One Size Fits All Answer

If you have a legacy stock(s) you are considering selling, there is not a standard “one size fits all” answer. There are however, various investment and income tax considerations. I discuss these issues and considerations below.

Capital Gains Rates

The marginal tax rate for capital gains in Ontario for income in the $45-$75k range is approximately 15%. This rate jumps to 22% or so between $90-$140k in taxable income and hits 26.8% once your taxable income exceeds $220,000.

These capital gains rates are the lowest tax rates you get in Canada. So from my perspective, the taxes you would pay from the sale of a legacy stock should not be the determinant in deciding to sell. The key factor (subject to the discussion below) should always be what the best investment decision is. Watching a stock drop 15%, to save 20% in capital gains tax, makes absolutely no sense, when viewed in isolation.

Some tax pundits think the upcoming (no date yet announced) Federal budget may change the taxable inclusion amount of a capital gain from 1/2 to 2/3 or even 3/4. If you are one of those people, now may be a time that the capital gains rate becomes a more significant factor in making your decision to sell a legacy stock (some people are selling and buying back). However, this is only a rumour and if there is no change in legislation, you would accelerate your tax payable.

Old Age Security Clawback

As noted above, the capital gains tax tail should not wag the tax dog. However, there is one issue that complicates the matter for seniors and that is the Old Age Security Clawback.

As evidenced by many accountants’ scars and wounds, never cause even the sweetest senior to have an OAS claw back, because all hell breaks loose :). I am only half-joking; seniors really resent having their OAS clawed back. I assume it is because they feel they have an entitlement to this money and the government does not have the right to claim all or some portion back (even though, they did not directly fund this program).

Seniors must pay back all or a portion of their OAS as well as any net federal supplements if their annual income exceeds a certain amount. For 2017, if your net income before adjustments is greater than $74,789 ($73,756 for 2016) then you will have to repay 15% of the excess over this amount, to a maximum of the total amount of OAS received. The maximum repayment is hit around $119,000.

So if you have a capital gain on a legacy stock of $90,000 ($45k taxable) and you are right at the $74,789 OAS limit before the capital gain, the tax cost of the capital gain would be around $15,000 or 17% of the $90,000 gain. However, when you add the OAS clawback that would be applicable, the combined tax and OAS clawback could approach $22,000 or 25% or so. That is why you cannot look at the gain in isolation.

If you do not have an investment reason to sell your stock, you may want to consider selling the stock over a few years to minimize the tax and OAS clawback, assuming you wish to keep the stock each year.

Holding Company

A “sexier” alternative, especially for seniors is to transfer your stocks to a holding company. You should be able to do this on a tax-free basis under Section 85 of the Income Tax Act. The benefit to doing this is any dividends earned and the eventual capital gain are taxed in the holding company and thus, do not affect your OAS clawback. In addition, if you have any potential U.S. estate tax exposure (see this prior blog post on estate tax), the U.S. stocks in your holding company will not be subject to U.S. estate tax (if there is U.S. estate tax -President Trump intends to eliminate the tax). So while you do not save any actual income tax, you can save your OAS from being clawed back and possibly gain some U.S. estate protection.

The downside to this strategy is the cost to transfer the stocks (legal and accounting) and ongoing accounting costs, which can be high for a holding company and thus, potentially a significant part of the OAS clawback savings is now paid to your accountant instead of the government, so you have to weigh the savings versus the costs.

Capital Losses

If you plan on triggering capital gains on legacy stocks, you should review if you have any capital losses you can apply against these gains. The CRA notes your capital loss carryforward balance on your notice of assessment and if you have a My CRA account, you can get this information online. It should be noted, the application of the losses only reduce the capital gains tax, not the OAS clawback.

Charitable Donation

Where you donate public securities to a registered charity, the capital gains inclusion rate is set to zero. Thus, there would be no capital gain to report on the donation of a legacy stock (have your accountant run the numbers, but this should minimize or eliminate the clawback) and you receive a donation credit. This is reported on Form T1170 . This strategy is effective if you make large donations every year or were planning to make a substantial donation and helps the charity since you have more funds to donate than with an after-tax donation.

The decision to sell a legacy stock is not a simple one. The overriding decision should still be an investment decision; however, where you are indifferent to selling, you need to consider the various issues and options I have noted above. Before undertaking any legacy stock selling, you should consult your accountant and investment advisor to account for all your personal circumstances.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation.

Tax Loss Selling (or for 2016 - Tax Gain Selling?)

In keeping with my annual tradition, I am today posting a blog on tax loss selling (or as per paragraph 3, maybe tax gain selling this year). I am doing it again because the topic is very timely and every year around this time, people get busy with holiday shopping and forget to sell the “dogs” in their portfolio and as a consequence, they pay unnecessary income tax on their capital gains in April.

Additionally, while most investment advisors are pretty good at contacting their clients to discuss possible tax loss selling, I am still amazed each year at how many advisors do not discuss the issue with their clients. So if you have an advisor, ensure you are in contact to discuss your realized capital gain/loss situation and other planning options (if you have to initiate the contact, consider that a huge black mark against your advisor).

For full disclosure, there is very little that is new in this post from last year's version; however, there is one issue I wish to discuss. I have had a few calls from clients asking whether they should sell their stocks with unrealized gains this year, instead of selling their stocks with unrealized losses. They are asking this question because they are worried the 2017 Federal budget may change the inclusion rate on capital gains from 1/2 to 3/4 as rumoured in the last budget.

I will provide you the same answer I provide them. I cannot tell you what to do. The Liberals have not clearly stated they intend to do such and thus, any change appears to be conjecture. However, given the Liberal's clear intention to tax the "rich", such a change would not be surprising, though many "middle class" taxpayers would also be affected. So you have to roll the dice either way.

Many people persist in waiting until the third week of December to trigger their capital losses to use against their current or prior years capital gains. To avoid this predicament, you may wish to set aside some time this weekend or next, to review your 2016 capital gain/loss situation in a calm methodical manner. You can then execute your trades on a timely basis knowing you have considered all the variables associated with your tax gain/loss selling. As the markets have been strong this year, you hopefully will have only a few stocks with unrealized capital losses you can sell to use the losses against capital gains reported the last 3 years. Alternatively, you may want to trigger a capital loss to utilize against capital gains you have already realized in 2016.

I would like to provide one caution in respect of tax loss selling. You should be very careful if you plan to repurchase the stocks you sell (see superficial loss discussion below). The reason for this is that you are subject to market vagaries for 30 days. I have seen people sell stocks for tax-loss purposes, with the intention of re-purchasing those stocks and one or two of the stocks take off during the 30 day wait period and the cost to repurchase is far in excess of their tax savings. Thus, you should first and foremost consider selling your "dog stocks" that you and/or your advisor no longer wish to own. If you then need to crystallize additional losses, be wary if you are planning to sell and buy back the same stock.

This blog post will take you through each step of the tax-loss selling process.

Reporting Capital Gains and Capital Losses – The Basics

All capital gain and capital loss transactions for 2016 will have to be reported on Schedule 3 of your 2016 personal income tax return. You then subtract the total capital gains from the total capital losses and multiply the net capital gain/loss by ½. That amount becomes your taxable capital gain or net capital loss for the year. If you have a taxable capital gain, the amount is carried forward to the tax return jacket on Line 127. For example, if you have a capital gain of $120 and a capital loss of $30 in the year, ½ of the net amount of $90 would be taxable and $45 would be carried forward to Line 127. The taxable capital gains are then subject to income tax at your marginal income tax rate.

Capital Losses

If you have a net capital loss in the current year, the loss cannot be deducted against other sources of income. However, the net capital loss may be carried back to offset any taxable capital gains incurred in any of the 3 preceding years, or, if you did not have any gains in the 3 prior years, the net capital loss becomes an amount that can be carried forward indefinitely to utilize against any future taxable capital gains.

Planning Preparation

I suggest you should start your preliminary planning immediately. These are the steps I recommend you undertake:

1. Retrieve your 2015 Notice of Assessment. In the verbiage discussing changes and other information, if you have a capital loss carryforward, the balance will reported. This information may also be accessed online if you have registered with the Canada Revenue Agency.

2. If you do not have capital losses to carryforward, retrieve your 2013, 2014 and 2015 income tax returns to determine if you have taxable capital gains upon which you can carryback a current year capital loss. On an Excel spreadsheet or multi-column paper, note any taxable capital gains you reported in 2013, 2014 and 2015.

3. For each of 2013-2015, review your returns to determine if you applied a net capital loss from a prior year on line 253 of your tax return. If yes, reduce the taxable capital gain on your excel spreadsheet by the loss applied.

4. Finally, if you had net capital losses in 2014 or 2015, review whether you carried back those losses to 2013 or 2014 on form T1A of your tax return. If you carried back a loss to either 2013 or 2014, reduce the gain on your spreadsheet by the loss carried back.

5. If after adjusting your taxable gains by the net capital losses under steps #3 and #4 you still have a positive balance remaining for any of the years from 2013 to 2015, you can potentially generate an income tax refund by carrying back a net capital loss from 2016 to any or all of 2013, 2014 or 2015.

6. If you have an investment advisor, call your advisor and request a realized capital gain/loss summary from January 1st to date to determine if you are in a net gain or loss position. If you trade yourself, ensure you update your capital gain/loss schedule (or Excel spreadsheet, whatever you use) for the year.

Now that you have all the information you need, it is time to be strategic about how to use your losses.

Basic Use of Losses

For discussion purposes, let’s assume the following:

· 2016: realized capital loss of $30,000

· 2015: taxable capital gain of $15,000

· 2014: taxable capital gain of $5,000

· 2013: taxable capital gain of $7,000

Based on the above, you will be able to carry back your $15,000 net capital loss ($30,000 x ½) from 2016 against the $7,000 and $5,000 taxable capital gains in 2013 and 2014, respectively, and apply the remaining $3,000 against your 2015 taxable capital gain. As you will not have absorbed $12,000 ($15,000 of original gain less the $3,000 net capital loss carry back) of your 2015 taxable capital gains, you may want to consider whether you want to sell any “dogs” in your portfolio so that you can carry back the additional 2016 net capital loss to offset the remaining $12,000 taxable capital gain realized in 2015. Alternatively, if you have capital gains in 2016, you may want to sell stocks with unrealized losses to fully or partially offset those capital gains.

Identical Shares

Many people buy the same company's shares (say Bell Canada) in different accounts or have employer stock purchase plans. I often see people claim a loss on the sale of their Bell Canada shares from one of their accounts, but ignore the shares they own of Bell Canada in another account. However, be aware, you have to calculate your adjusted cost base on all the identical shares you own in say Bell Canada and average the total cost of all your Bell Canada shares over the shares in all your accounts. If the cost of your shares in Bell are higher in one of your accounts, you cannot pick and choose to realize a loss on that account; you must report the average adjusted cost base of all your Bell shares, not the higher cost base shares.

Creating Gains when you have Unutilized Losses

Where you have a large capital loss carryforward from prior years and it is unlikely that the losses will be utilized either due to the quantum of the loss or because you are out of the stock market and don’t anticipate any future capital gains of any kind (such as the sale of real estate), it may make sense for you to purchase a flow-through limited partnership (be aware; although there are income tax benefits to purchasing a flow-through limited partnership, there are also investment risks and you must discuss any purchase with your investment advisor). 

Purchasing a flow-through limited partnership will provide you with a write off against regular income pretty much equal to the cost of the unit; and any future capital gain can be reduced or eliminated by your capital loss carryforward. For example, if you have a net capital loss carry forward of $75,000 and you purchase a flow-through investment in 2016 for $20,000, you would get approximately $20,000 in cumulative tax deductions in 2016 and 2017, the majority typically coming in the year of purchase. Depending upon your marginal income tax rate, the deductions could save you upwards of $10,700 in taxes. When you sell the unit, a capital gain will arise. This is because the $20,000 income tax deduction reduces your adjusted cost base from $20,000 to nil (there may be other adjustments to the cost base). Assuming you sell the unit in 2018 for $18,000 you will have a capital gain of $18,000 (subject to any other adjustments) and the entire $18,000 gain will be eliminated by your capital loss carry forward. Thus, in this example, you would have total after-tax proceeds of $28,700 ($18,000 +$10,700 in tax savings) on a $20,000 investment.

Donation of Flow-Through Shares

Prior to March 22, 2011, you could donate your publicly listed flow-through shares to charity and obtain a donation receipt for the fair market value ("FMV") of the shares. In addition, the capital gain you incurred [FMV less your ACB (ACB is typically nil or very low after claiming flow-through deductions)] would be exempted from income tax. However, for any flow-through agreement entered into after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Simply put (the rules are more complicated, especially for limited partnership units converted to mutual funds and an advisor should be consulted), if you paid $25,000 for your flow-through shares, only the gain in excess of $25,000 will now be exempt and the first $25,000 will be taxable.

So if you are donating flow-through shares to charity this year, ensure you speak to your accountant as the rules can be complex and you may create an unwanted capital gain.

Superficial Losses

One must always be cognizant of the superficial loss rules. Essentially, if you or your spouse (either directly or through an RRSP) purchase an identical share 30 calendar days before or 30 days after a sale of shares, the capital loss is denied and added to the cost base of the new shares acquired.

Disappearing Dividend Income

Every year I ask at least one or two clients why their dividend income is lower on their personal tax return. Typically the answer is, "oops, it is lower because I sold a stock early in the year that I forgot to tell you about". Thus, if you manage you own investments; you may wish to review your dividend income being paid each month or quarter with that of last years to see if it is lower. If the dividend income is lower because you have sold a stock, confirm you have picked up that capital gain in your calculations.

Creating Capital Losses-Transferring Losses to a Spouse Who Has Gains

In certain cases you can use certain provisions of the Income Tax Act to transfer losses to your spouse. As these provisions are complicated and subject to missteps, you need to engage professional tax advice.

Settlement Date

It is my understanding that the settlement date for Canadian stock markets in 2016 will be December 23rd (The U.S. exchanges may be different). Please confirm this date with your broker, but assuming this date is correct, you must sell any stock you want to crystallize the gain or loss in 2016 by December 23, 2016.

Summary

As discussed above, there are a multitude of factors to consider when tax-loss selling. It would therefore be prudent to start planning now, so that you can consider all your options rather than frantically selling via your mobile device while waiting in line with your kids to see Santa the third week of December.

This site provides general information on various tax issues and other matters. The information is not intended to constitute professional advice and may not be appropriate for a specific individual or fact situation. It is written by the author solely in their personal capacity and cannot be attributed to the accounting firm with which they are affiliated. It is not intended to constitute professional advice, and neither the author nor the firm with which the author is associated shall accept any liability in respect of any reliance on the information contained herein. Readers should always consult with their professional advisors in respect of their particular situation. Please note the blog post is time sensitive and subject to changes in legislation or law.